Abbott defends 6 per cent jobless rate

The weaker-than-expected jobs market has raised questions about whether the Reserve Bank has stimulated the economy enough to support growth in areas other than mining.

The immediate reaction from investors to the latest jobs data - released on Thursday by the ABS - was clear. The Australian dollar fell by a cent to US89.31¢, while yields on 10-year government bonds fell from 4.23 per cent to 4.19 per cent, indicating rising hopes of another RBA interest rate cut.

But those hopes are likely to be misplaced.

More Australians were looking for work in January than at any time in the past 10 years. Photo: Louise Kennerley

'Jobless recovery'

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Apart from the jobs data, other economic indicators have pointed to an improvement in some of the non-mining sectors.

House prices and have strengthened and more building is being approved. Consumers have started to spend more at local retailers, and businesses say operating conditions have improved.

Meanwhile, the labour market has continued to soften over the past year.

Indeed, it has become the "Achilles heel" of the economy, Citi economists Paul Brennan and Josh Williamson said. To put it another way, the National Australia Bank's economists have described this as the "jobless recovery".

Yet the rising unemployment rate is no surprise to the Reserve Bank.

The central bank has been lowering the cash rate since November 2011, taking it down to a record-low of 2.5 per cent as it readied the economy for a peak in the unprecedented mining investment boom.

The RBA has flagged a rise in the jobless rate for some time, tipping it to peak at 6.25 per cent this year as the economy expands at a slower-than-expected pace. Treasury also has a 6.25 per cent forecast for the unemployment rate.

Moderate growth

In the RBA's Statement of Monetary Policy released on Friday, the central bank said that "with growth of economic activity expected to remain below trend for a few more quarters at least, it is likely that employment growth will be only moderate over the coming year and the unemployment rate will continue to edge higher".

Another factor that is seeing most economists stick to their forecasts - with the median view being that the Reserve Bank will keep rates on hold at 2.5 per cent for the rest of this year - is that the Bureau of Statistics data is a lagging indicator. This means the January figures might not be reflecting the recent improvements in the economy we have seen in the other sets of data.

"In recent months, we have seen more encouraging signs in the economy, but that will take some time to feed through to the jobs numbers," St George's chief economist Besa Deda said.

"Leading indicators are showing some stabilisation, which is encouraging. [But] we can expect the unemployment rate to edge higher through the first-half of this year."

The RBA has another economic indicator to worry about - inflation.

Consumer prices jumped unexpectedly in the three months of last year towards the top-end of the central bank's target band of 2 to 3 per cent. The cause of the jump in inflation figures is not yet clear, as the RBA noted in its Statement on Monetary Policy, but the shift upwards was significant enough for the central bank to update its inflation and GDP forecasts.

"It has been made crystal clear in recent RBA rhetoric, including the February Statement on Monetary Policy, that after the higher than expected fourth-quarter CPI and some more positive reads from monthly economic data like retail sales and building approvals, that the RBA's 2013 worry about downside risks to domestic growth have now been superseded in early 2014 by concerns about upward risks to domestic inflation," Commonwealth Bank of Australia senior economist John Peters said.

Weakening exchange rate

And then there's the Australian dollar.

The currency has fallen off its parity highs with the US dollar, tumbling by 18 per cent since mid-April to a three-year low of US86.60c in January. But it has picked up again recently following a bout of soft US jobs reports.

The Reserve Bank has made it clear that it prefers a lower exchange rate, rather than even lower interest rates, to stimulate growth in the economy. Lower interest rates could also overheat the housing sector, which is already seen home prices rise by 10 per cent last year.

The soft jobs market is consistent with the changes the economy is undergoing as it moves away from a dependence on mining investment to boost growth.

Economists think the Reserve Bank is not about to revise its neutral monetary policy stance and what it flagged at its last board meeting as a "period of stability" in interest rates following the recent run of positive non-jobs data.

But the weakness in the labour force numbers also makes the likelihood of a rate hike in the short-term seem unlikely.

In the meantime, attention will shift to the latest reading of GDP growth, which is set to be published in early March, as well as the federal government's May budget for signs of whether there would be a tightening of spending.